What Explains Japan ’ s Persistent Deflation ?

  title={What Explains Japan ’ s Persistent Deflation ?},
  author={Carlos Carvalho PUC - Rio Andrea Ferrero and andrea. ferrero},
We argue that a failure to account for demographic trends when calibrating monetary policy might explain Japan’s persistent deflation. The demographic transition —in particular the increase in life expectancy —puts downward pressure on the natural real interest rate. Monetary policy rules that do not internalize this effect may end up being too restrictive, and lead to deflation in equilibrium. We calibrate a stylized model of a dynamic, monetary economy with a life-cycle structure to japanese… CONTINUE READING

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